are cons which will cost $2,350,000. As a result of the investment, sales are ex
ID: 2802051 • Letter: A
Question
are cons which will cost $2,350,000. As a result of the investment, sales are expected to increase by $1,140,000 in each of the next three years (that is, each year's sales are $1,140,000 for the project analysis). Operating costs are 18% of sales. The equipment will be depreciated via 3 year MACRS schedule. The firm expects net working capital needs to be $80,000 at year 0, $70,000 in year I, and s100,000 in year 2. New working capital is recovered in the subsequent year (the year after the need). The firm also expects to sell the equipment at the end of year 3 for $450,000. The firm's tax rate is Estimate cash flows for the project, and compute NPV using a cost ofcapital of 8%, and indicate accept or reject. 40 points Use the attached capital budgeting templates for your workExplanation / Answer
Accept the project becuase the NPV is positive.
Working notes:
1) Depreciation
2) Change in NWC
3) After tax salvage value
0 1 2 3 Incremental sales $11,40,000 $11,40,000 $11,40,000 Operating costs $2,05,200 $2,05,200 $2,05,200 Depreciation $13,70,755 $6,52,830 $2,90,225 Operating income -$4,35,955 $2,81,970 $6,44,575 Tax -$1,74,382 $1,12,788 $2,57,830 Net income -$2,61,573 $1,69,182 $3,86,745 Operating cash flow $11,09,182 $8,22,012 $6,76,970 Initial investment -$23,50,000 Change in NWC -$80,000 $10,000 -$30,000 $1,00,000 After tax salvage value $2,84,476 Net cash flows -$24,30,000 $11,19,182 $7,92,012 $10,61,446 Discount factor $1 $0.926 $0.857 $0.794 Present value of cash flows -$24,30,000 $10,36,280 $6,79,023 $8,42,610 NPV $1,27,912Related Questions
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